Topic: The Remittance Trap: A Blessing or a Burden for Pakistan?
While remittances significantly boost foreign exchange reserves and help reduce poverty, an overreliance on them can pose serious long-term economic risks. This inflow of money often creates an artificial sense of financial stability without addressing structural economic weaknesses. Remittances are a major source of income and foreign exchange for many developing countries, including Pakistan. Pakistan heavily relies on remittances to sustain itself support its balance of payments and maintain household incomes.
A Historical Overview of Remittances in Pakistan
During the early years of Pakistan’s independence, there were minimal remittance inflows. This was due to the nascent stage of the country’s economy and absence of a large diaspora. Pakistan had yet to establish significant migration patterns for labour, particularly to the Middle East. Remittances in this period were relatively low, with estimates in the early 1950s being below USD 100 million annually.
During the 1960s, Pakistan witnessed a modest rise in remittance inflows. This period marked the beginning of international labour migration, particularly to the United Kingdom and the early stages of movement toward Gulf countries. Although the major oil boom in the Middle East occurred in the 1970s, the 1960s laid the foundation for overseas employment.
The 1970s marked a significant surge in remittances due to the rapid expansion of labour migration to the Middle East, especially after the 1973 oil crisis. By 1973, Pakistan’s remittance inflows had reached approximately $136 million, a substantial increase compared to earlier years, largely driven by the increasing number of workers in the Gulf region.
Pakistan’s remittance inflows have shown a fluctuating yet overall increasing trend over the decades. In 1980, the country received $2 billion in remittances, which slightly increased to $2.435 billion by 1985. However, the figure remained steady at $2 billion in 1990 and then declined to $1.71 billion in 1995, and further to $1.09 billion in 2000. A significant rise was observed afterward, reaching $3.57 billion in 2005, $8.9 billion in 2010, and $18.7 billion in 2015. By 2020, remittances had surged to $22.1 billion and were projection for 2025 suggest an inflow of $35 billion, indicating a strong upward trajectory in dependence on foreign remittances.
How Remittances Benefit Pakistan’s Economy
1. Foreign Exchange Reserves Increase
Remittances are typically sent in foreign currencies such as U.S. dollars, Saudi riyals, and UAE dirhams. These inflows directly contribute to Pakistan’s foreign exchange reserves, which are maintained in foreign currencies—not in Pakistani rupees. Strong foreign reserves are vital for the country’s economy, as they are used to pay for essential imports such as oil, food, and machinery, service external debt, and stabilize the Pakistani rupee in the international currency markets
According to the recent statistics from the State Bank of Pakistan, SBP holds $12 billion in reserves, Commercial bank hold $5 billion, and total liquid foreign reserves are $17 billion. When remittances are received and converted into Pakistani rupees by households, the State Bank acquires more foreign currency. This strengthens Pakistan’s overall reserve position, improves the rupee’s value, and enhances its ability to manage its international financial obligations viz imports and debts.
2. Boost in Domestic Consumption
Diaspora economy provides financial support to families, who often spend the money on essential needs such as food, housing, education, healthcare, and daily consumption. This increased spending boosts demand for goods and services in the local economy. As a result, it stimulates business activity, supports small enterprises, and contributes to job creation, particularly in the retail, construction, and service sectors.
Remittances are a lifeline for millions of poor households in developing countries.”
— Dilip Ratha
3. Supports Balance of Payments
Pakistan regularly faces a trade deficit, as its imports exceed its exports. This results in a current account deficit. Remittances act as a stabilizing force by providing a steady inflow of foreign currency, which helps offset this deficit. This helps reduce the pressure on the country’s external finances and lessens the immediate need to borrow from international lenders such as the IMF or World Bank.
4. Strengthening the Banking and Financial System
When remittances are sent through formal channels such as banks, Western Union, and money transfer operators, they increase the flow of money within the formal economy. This has several benefits: This promotes financial inclusion by encouraging families to use banking services. It enhances the government's ability to monitor financial transactions, which helps in economic planning and reducing illicit financial flows.
While the government does not directly receive remittances, their circulation in the formal economy indirectly boosts tax collection through increased consumption and business activity. In these ways, remittances help strengthen the overall financial system and bring more economic activity under formal oversight.
Why Overreliance on remittances is risky?
1. Overdependence on Remittances
Pakistan has become increasingly reliant on remittances to sustain its balance of payments and foreign exchange reserves. While these inflows provide short-term economic relief, this overdependence conceals deeper structural issues such as: Weak export performance, poor industrial productivity and limited domestic job creation.
2. Brain Drain
The remittance-driven economy often encourages the migration of labour, including highly skilled professionals such as doctors, engineers, and IT experts. While their remittances benefit the economy, their departure contributes to brain drain—a loss of valuable human capital. This trend weakens Pakistan’s long-term development by depriving critical sectors (such as healthcare, education, and technology) of skilled professionals. Many of these individuals leave the country due to limited job opportunities, low wages, and a lack of research and innovation facilities at home.
3. Artificial Economic Comfort
High remittance inflows can create a false sense of economic stability, masking underlying weaknesses in the economy. This illusion often leads governments to delay much-needed structural reforms in areas such as taxation, energy, industrial policy, and governance.
4. Vulnerability to External Shocks
Remittance inflows are highly sensitive to global economic and political developments—factors that lie beyond Pakistan’s control. Key risks include:
Economic recessions in host countries (e.g., Gulf States)
Declines in global oil prices, which reduce employment opportunities in oil-rich countries
Policy shifts such as stricter visa regulations, labour nationalization programs
Such external shocks can lead to job losses for overseas workers, reducing remittance flows. This, in turn, can weaken Pakistan’s foreign exchange reserves and affect the household incomes of millions of families who rely on money sent from abroad.
What Pakistan can learn from Bangladesh’s Model.
Bangladesh has emerged as one of the top remittance-receiving countries in South Asia, with inflows exceeding $21.6 billion in 2023. Unlike Pakistan, Bangladesh has managed to balance remittances with strong export-led growth, particularly in the garment sector. Its policies reflect strategic planning, institutional support, and inclusive development — a model from which Pakistan can learn.
Bangladesh prioritized sending remittances through formal banking systems. This helped increase transparency, reduce money laundering, and improve foreign reserves. Pakistan should discourage informal channels (hundi/hawala) and offer higher incentives and digital options to attract remittances into formal systems.
Bangladesh didn’t rely on remittances alone — it built a world-leading textile and garment export sector, now worth over $45 billion annually. Government invested in Special Economic Zones (SEZs), Power and transport infrastructure and Women workforce participation in manufacturing. Pakistan should revive industrial zones, support textile and IT exports, and invest in infrastructure to reduce reliance on remittance inflows alone.
Bangladesh’s example shows that remittances can be a ladder, not a crutch. For Pakistan, it is time to move from survival economics to strategic economics — learning from Bangladesh’s deliberate and structured approach.
Pakistan may face symptoms of Dutch Disease if increasing remittance inflows continue to weaken the competitiveness of its export-oriented sectors.”
Dr Nadeem Ul Haque strongly argues that Pakistan’s economy relies too heavily on remittances rather than producing goods, services, and innovation. He calls this model a “rentier economy”, where the country survives on unearned income (aid, remittances, loans) instead of creating wealth.
“Remittances are a crutch, not a cure.”
Moreover, Remittances allow the government to delay hard decisions as the steady inflow of remittances masks the real structural weaknesses of the Pakistani economy. Policymakers avoid the necessary reforms because remittances provide temporary balance of payments relief.
Dr. Haque proposes that instead of exporting manpower, Pakistan needs to invest in minds — not send them away.
To cap it all off, given the vulnerabilities and limitations associated with overreliance on remittances, Pakistan must shift its focus toward building a knowledge-based economy. This requires investing in education, innovation, and human capital to harness the potential of creative minds for national development. Creating more employment opportunities, ensuring meritocracy, and promoting transparency within the country can reduce the push factors that drive skilled workers abroad. Pakistan must transition from remittance dependence to self-reliance.
While exporting low-skilled labour may generate short-term revenue through remittances, the long-term progress of Pakistan depends on retaining its best minds. These individuals have the capacity to transform the country from within—something remittance inflows alone cannot achieve.
By:
The article is authored by Shahbaz Munawar Kazmi, a graduate of the English Department, Bahauddin Zakariya University, Multan. He can be reached at [email protected]
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